Knowledge Base

What is Bitcoin?

Bitcoin is a peer-to-peer electronic cash system. Peer-to-peer means that no central authority issues new money or tracks transactions. These tasks are managed collectively by the network. Bitcoins are the unit of account of the system. Simply put, bitcoin is cash made out of digital coins. There are such things as physical bitcoins, but ultimately, a bitcoin is just a number associated with a bitcoin address. A physical bitcoin is simply an object, such as a coin, with the number carefully embedded inside.

Is it “Bitcoin” or “bitcoin”?

Since Bitcoin is both a virtual currency and a protocol, capitalization can be confusing. Accepted practice is to use Bitcoin (singular with an upper case letter B) to label the protocol, technology, and community, and bitcoins (with a lower case b) to label units of the crypto coin.

Is it “XBT” or “BTC”?

The commonly used shorthand is “XBT” or "BTC" to refer to a price or amount (e.g.: “100 XBT”). Until fairly recently bitcoin units were abbreviated as “BTC” or “mBTC” (millibitcoin) in everyday language. “XBT” became popular when Bloomberg started to use this ticker symbol for bitcoin. “XBT” anticipates the ISO 4217 currency code standard. Currency codes are composed of a country's two-character country code plus a third character denoting the currency unit. For example, the Swiss Franc (CHF) is made up of Switzerland’s country code (CH = Confoederatio Helvetica) plus a currency designator ("F = franc"). In the event a currency is not sponsored by a governmental organization (like bitcoin), it is preceded with an "X". If bitcoin is ever to be added to the ISO 4217 currency code list, it is the belief of many that this will happen as “XBT”. To facilitate this transition, Bloomberg as well as leading members of the Bitcoin community refer to bitcoin as “XBT”.

Do I have to transact with a whole bitcoin?

You don’t need buy or transact a whole bitcoin. Bitcoin has 8 decimal digits and can be broken down to 0.00000001 which is called a Satoshi.

How does Bitcoin work?

Bitcoin uses public-key cryptography, peer-to-peer file-sharing technology, and proof-of-work to process and verify payments. Bitcoins are sent (or signed over) from one address to another with each user potentially having many addresses. Each payment transaction is broadcasted to the network and included in the block chain ledger, so that the bitcoins cannot be spent twice. After a few minutes, each transaction is locked in time by the massive amount of processing power that continues to extend the block chain. Using these techniques, Bitcoin provides a fast and extremely reliable payment network that anyone can use.

What is a cryptographic payment and why should I use it?

Cryptographic means of payment refers to peer-to-peer electronic cash transactions whereby digital coins function as a medium of exchange and can be instantly transferred between any two computers in the world. Compared to traditional payment systems, digital money (e.g. bitcoin) enables users to transfer digital assets directly over the Web within a few minutes rather than exchanging electronic messages between banks followed by the movement of funds through debiting and crediting several accounts at each institution and at intermediary banks which results in transfer times of a few days. There are significantly lower processing fees for transferring digital cash compared to wire transfer or card payments through VISA, MasterCard or PayPal. The first crypto coin to begin trading was bitcoin in 2009. Since then, numerous crypto coins have been created. Paying with crypto coins is similar to electronic cash. It can be used to pay friends or merchants.

What is "virtual currency"?

There are a large number of virtual currency schemes that have been created and which function in different ways.  The European Central Bank (ECB) divides them up into three categories:

  • Closed virtual currency schemes: These are usually intended for buying virtual goods and services within the actual virtual community and the user obtains the currency through some form of activity. Some of these are earned and used in certain online games, such as World-of-Warcraft Gold. Closed virtual currency schemes are linked to the real economy and common examples are the bonus systems that airlines (air miles) or some credit cards offer.

  • Virtual currency schemes with unidirectional flow: The virtual currency is bought for real money but cannot be converted back. The exchange rate is determined by the system owner.  An example is Amazon Coins, which Kindle-users can buy with real money and then use to purchase applications and so on. Another example is the now discontinued Facebook Credits, which could be used to buy virtual goods and services within Facebook.

  • Virtual currency schemes with bidirectional flow: In these schemes, one can use money to buy the virtual currency and also convert it back into money at special exchange websites. There may be both market-based exchange rates and predetermined, fixed exchange rates. Examples of currency schemes with bidirectional flows include Bitcoin, Ripple and Linden Dollar.

Is bitcoin a "virtual currency"?

Bitcoin is referred to as “virtual currency” or “crypto currency” in common parlance. In fact, it is a complementary currency but not legal tender. Among other things, bitcoin is a medium of exchange, a store of value and a unit of account that can be used as a means of payment. Crypto coins are electronically created assets allowing credit entries to be made directly between payer and payee with instant settlement and without counterpart risk existing through clearing houses, which stands in contrast to traditional clearing and settlement mechanisms used by debt-based payment networks (e.g. card payments, interbank transfers).

What is the Internet of Money?

Bitcoin technology provides connectivity to banks and financial inclusion to non-banks on a global basis. Technically speaking, you can be your own bank.  This disruptive technology puts money into the hands of people rather than limiting the control on cash flow and fund transfer to financial institutions. The pioneering innovation consists of clearing and settlement being done at the same time through consensus-based file-sharing on the so-called block chain located in the Cloud. The Bitcoin protocol that enables assets and payments to enter the decentralized computer network through secure cryptographic procedures is considered to be the Internet of Money.

Are bitcoin, digital cash and digital money one and the same?

Virtual currency is a digital representation of an asset. Cryptographic coins that are denominated in bitcoin or any other crypto unit represent “digital cash” respectively “digital money”.  Simply put, digital money is an electronic form of cash in addition to paper banknotes and metal coins.

Why do I have to wait 10 minutes?

Compared to wire transfers that can take days to clear, transmitting payments with Bitcoin is almost instant. Nevertheless, it can take up to 10 minutes before the network begins to confirm your transaction by including it in the block chain ledger. A confirmation means that there is a consensus on the network that the bitcoins you have received haven't been sent to anyone else, also known as the so-called "double-spending problem" or "Two General's Problem". As soon as the bitcoins are considered your property, you can spend the bitcoins you have received. Once your transaction has been included in one block, it will continue to be buried under every block after it, which exponentially consolidates this consensus and eliminates any risk of a reversed transaction. Every user is free to determine at what point a transaction is considered confirmed, but 6 confirmations is normally considered to be as safe as waiting 6 months on a credit card transaction.

How long does it take to “wire” bitcoins?

Sending bitcoins is similar to wiring money, with the exception that digital cash travels much faster over the wires than other types of transactions. After a transaction is broadcast to the network, it may be included in a block that is published on the block chain. When that happens, it means that one confirmation has occurred for the transaction. With each subsequent block that is found, the number of confirmations is increased by one. To protect against double-spending, a transaction should not be considered as confirmed until a certain number of blocks verify that transaction. The classic Bitcoin client will show a transaction as "unconfirmed" until 6 blocks verify the transaction. On average, each block takes 10 minutes to be generated, resulting in a one-hour waiting period for a transaction to be considered “confirmed.” Merchants who accept bitcoins as payment can set their own threshold of how many confirmations are required until funds are considered valid. When potential losses due to double-spending are nominal, as with very inexpensive or non-fungible items, payments are considered confirmed as soon as they are seen on the network. Most merchants who bear risk from double-spending require 6 or more blocks to confirm a transaction.

Why bitcoin when card transactions take a fraction of a second?

Admittedly, credit card transactions clear faster than bitcoin but that's only half the story. Even though card payments clear in a fraction of a second, the actual settlement process behind the payment authorization takes a few days and carries the risk of chargebacks as well as fraud for a long period of time. In fact, the underlying settlement process involves bookings between the payer's bank and the merchant's bank. These are accomplished through clearinghouses, and are costly in terms of time. Having said this, credit card payments are actually not the right equivalent to digital cash. Bitcoin is more comparable to wire transfer because with both systems settlements are final, hence they cannot be reversed.

Why can't I wire bitcoin through my bank?

You can't send bitcoin through your bank because there are only a few banks in the world utilizing the Bitcoin-like technology today. Fidor Bank in Germany is one of them. Essentially, bitcoin is a paradigm shift. Ultimately, the Bitcoin protocol lets anyone act like a bank - at least from a technical perspective. The exceptional feature of bitcoin is its ability to store and transfer value digitally, thus functioning as a medium of exchange that shortens the clearing and settlement mechanism into one single action combining both processes into a fully integrated operation without requiring further intermediaries. This is very different from conventional payment systems used by banks today. When money travels, banks use financial messaging services for clearing funds digitally whereby the subsequent settlement process is totally separated and tied to a wide array of arrangements with financial intermediaries, including the physical movement of funds. 

Why do bank wires take much longer than sending bitcoin?

Wire transfers with commercial banks take a few days because today’s payments systems are very fragmented. That is one of the reasons why Bitcoin technology can make a difference in the world. Digital money offers a fast and low-cost way to transfer money globally, providing access to efficient financial systems to anyone on this planet, not only to the wealthy. While investment banks transacting in financial markets move billions at the touch of a button, real-economy payments are still lagging behind. It is critical to understand the given process in conventional money transfer in order to recognize the cause of the delay. In electronic funds transfer, payments get credited from one bank account to another bank account through financial messaging services and counter-entries that subsequently require the actual movement of funds. To do so, banks maintain accounts with each other at bank-operated clearinghouses and state-owned central banks, which in turn maintain accounts at the Bank for International Settlements (BIS) in Basel, Switzerland, making this international organization the bank of central banks.

So why can't banks make regular transfers faster than bitcoin?

Ideally, payments should travel as fast as email. That's the theory, but the practice is different. Day-to-day financial institutions around the world perform gross and net settlement procedures on a domestic and international level using clearinghouses like EBA in Europe, SIC in Switzerland, NACHA in the USA, ECS in India, CNAPS in China, etc. Cross-border payments are processed through specialized interbank networks like SWIFT. In addition, card payments or ATM transactions run on the rails of private networks like VISA or MasterCard, which in turn are connected with most financial institutions. Through net settlement, banks essentially pay the open balance between the accounts maintained at jointly operated clearing houses or at central banks, thereby limiting the need of physical cash transport. This elaborate system requires intermediary banks trusting each other whereby messaging services, clearinghouses and central banks ensure connectivity, liquidity, and scheme integrity. At the end of the day, bank transfers are complex and time-consuming, especially when completing cross-border transactions.

What is the difference between clearing and settlement in payments?

Understanding the difference between clearing and settlement is vital to comprehend how payment systems work today and why Bitcoin is a disruptive technology. In finance, clearing is a commitment made for a transaction until it is settled. Clearing of payments is necessary to turn the promise of payment (e.g., a check, a card authorization, or electronic fund request) into actual movement of funds from one bank to another. Settlement is the corresponding exchange of money or store of value (financial instruments like securities). Fundamentally, transactions utilizing the age-old banking system based on the conventional clearing and settlement mechanism - be it card payments or wire transfers - cannot be considered complete without eventually establishing trust between financial institutions, and cannot be marked as settled without mutually updating accounts at intermediary banks. The Bitcoin protocol, however, stores value and as such acts as a sealable medium of exchange enabling payments through the block chain ledger and providing public consent as a third-party method of establishing trust between the transacting parties.

Why does digital money make a difference in the world?

The majority of the world's population is either under-banked or unbanked. 2.5 billion Adults have no access to formal financial services. This situation is often linked to poverty. Billions of people are disadvantaged economically, socially and politically. We at Payment21® believe that everyone has the right to save, invest or transfer funds securely and at affordable cost. Digital money (e.g. bitcoin) can be a driving force of financial inclusion and economic empowerment. Inclusive growth generates economic growth, the benefits of which are widely shared.

What are the advantages of bitcoin?

  • Payment freedom: It is possible to send and receive any amount of money instantly anywhere in the world at any time. No bank holidays. No borders. No imposed limits. Bitcoin allows its users to be in full control of their money and enjoy payment freedom.

  • Very low fees: Bitcoin payments are currently processed with either no fees or extremely small fees. Users may include fees with transactions to receive priority processing, which results in faster confirmation of transactions by the network. Additionally, Payment21® assists merchants in converting bitcoin transactions to valuta and depositing funds directly into their bank account in the desired currency. As our processing services are based on the Bitcoin protocol, they can be offered for much lower fees than credit card transactions or bank transfers.

  • Fewer risks for merchants: Bitcoin transactions are secure, irreversible, and do not contain customers’ sensitive or personal information. This protects merchants from losses caused by deception or fraudulent chargebacks. Merchants can easily expand to new markets where either credit cards are not available or fraud rates are unacceptably high. The net results are lower fees, global markets, and fewer administrative costs.

  • Security and control: Bitcoin users are in full control of their transactions; it is impossible for merchants to force unwanted or unnoticed charges as can happen with other payment methods. Bitcoin payments can be made without personal information tied to the transaction. This offers strong protection against identity theft. Bitcoin users can also protect their money with backup of data and encryption.

  • Transparent and neutral: All information concerning the bitcoin money supply itself is readily available on the block chain ledger for anybody to verify and use in real-time. No individual or organization can control or manipulate the Bitcoin protocol because it is cryptographically secure. This allows the core of Bitcoin to be trusted for being completely neutral, transparent and predictable.

What are the disadvantages of bitcoin?

  • Degree of acceptance: Many people are still unaware of bitcoin. Every day, more businesses accept bitcoins but the list remains small and still needs to grow in order to benefit from network effects.

  • Volatility: The total value of bitcoins in circulation and the number of businesses using bitcoin are still very small compared to what they could be. Therefore, relatively small events, trades, or business activities can significantly affect the price. In theory, this volatility will decrease as bitcoin markets and the technology matures. Never before has the world seen a digital medium of exchange which is digital and secure, so it is truly difficult and exciting to imagine how it will play out.

  • Ongoing development: Bitcoin software is still in beta with many incomplete features in active development. New tools, properties, and services are being developed to make bitcoin more secure and accessible to the masses. Some of these are still not ready for everyone. In general, bitcoin is still in the process of maturing.

Is Bitcoin secure?

Bitcoin technology - the protocol controlling the block chain and the cryptography - has a strong security track record, and the Bitcoin network is probably the biggest distributed computing project in the world. Bitcoin's most common vulnerability is in user error. Bitcoin wallet files that store the necessary private keys can be accidentally deleted, lost or stolen. The latter is pretty similar to having the credentials of your e-banking account stolen. Essentially, bitcoin is like money on your bank account or physical cash in your purse. However described, bitcoin is stored in digital form and thus requires a reasonable level of caution as well as necessary care when dealing with it. Luckily, users can employ sound security practices to protect their money or use service providers that offer good levels of security and insurance against theft or loss.

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